CEOs: Riding off into the (well-funded) sunset

Pension benefits accrue handsomely for the guys at the top of S&P 500 companies, one study finds.

By Jeanne Sahadi, CNNMoney.com senior writer

June 11 2007: 5:31 PM EDT

NEW YORK (CNNMoney.com) -- The world of corporate pensions may be shrinking, but it's still fairly robust at S&P 500 companies. And that's true for no one more so than the current crop of the companies' already highly paid CEOs, who have accrued retirement benefits worth over $2 billion today, according to a report released Monday.

Two-thirds of S&P 500 companies still offer defined benefit pension plans to their employees, but an estimated 73 percent also offer their top executives an additional pension-like plan known as a Supplemental Executive Retirement Plan (SERP), according to a new study from The Corporate Library, a watchdog on executive compensation issues.

The Corporate Library examined the latest proxy statements from 353 S&P 500 companies, and found that 258 CEOs had defined benefit pension plans and SERPs, in which they had accumulated $2.6 billion in benefits to date.

While both traditional pensions and SERPs are entirely funded by the employer, SERPs are much more lightly regulated, and companies have a lot more flexibility in how they design them.

Another big difference between the two is their retention potential. With a traditional plan, the longer an employee's tenure, the greater his pension benefit because benefits accrue more quickly at the end of one's career. So leaving the company after only a few years means a much smaller pension.

That's not necessarily the case with a SERP. While SERPs may have restrictions based on years of service dictating when and how much a CEO will be paid, in reality, when a CEO leaves for another company, his new employer is likely to offer so-called "make whole" or "golden hello" provisions that essentially duplicate the value of his old SERP in his new job, explained Paul Hodgson, a senior reasearch associate at The Corporate Library. Moreover, executives may be allowed to take a payout before retirement in place of a benefit accrual, as was the case for Louis Camilleri, CEO of Altria (Charts, Fortune 500) who took a nearly $2 million payout while remaining in his post.

"It seems to be a portable benefit. It's supposed to be based on service and performance," Hodgson said. But, he noted, "it sends the message that it doesn't matter whether you stay or not."

Based on an analysis of over 1,800 public companies, the Corporate Library found the average tenure of CEOs with SERPs was six years, identical to that of CEOs without them.

When the time comes to pay out a SERP, the average value at an S&P 500 company is $10.1 million, the Corporate Library found. But some CEO payouts dwarf that. Hodgson notes that Lee Raymond left Exxon Mobil (Charts, Fortune 500) with close to $100 million in a lump-sum pension payment. William McGuire at United Health (Charts, Fortune 500) is likely going to be eligible for a lump-sum pension payment of $91.3 million. And Kenneth Lewis of Bank of America (Charts, Fortune 500) is in line for $50 million on top of other deferred compensation.

Of the 258 CEOs with SERPs, the report found that 219 also had savings in other non-qualified deferred compensation plans (NQDCs). An NQDC doesn't have to be tied to retirement per se, but is a vehicle in which an executive may choose to defer some of his compensation so that he won't owe taxes on it for some period of time, said pension expert and Employee Benefit Research Institute Fellow Jack VanDerhei. A company may match an executive's NQDC contribution and it may make non-matching contributions as well.

Hodgson acknowledges that the amount of retirement benefits paid to S&P 500 CEOs won't come anywhere close to breaking the bank, but, he said, "if you have an NQDC plan and managed to save $20 million for retirement it's unlikely you'll need a SERP as well."

As for the argument that SERPs and deferred compensation are rewards for a job well done, Hodgson counters, "You've been paying for that all along."